Rayovac 2010 Annual Report Download - page 118

SPECTRUM BRANDS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
(o) Adjustment eliminated the balance of goodwill and other unamortized intangible assets of the Predecessor
Company and records Successor Company intangible assets, including reorganization value in excess of
amounts allocated to identified tangible and intangible assets, also referred to as Successor Company
goodwill. (See Note 6, Goodwill and Intangible Assets, for additional information regarding the Company’s
goodwill and other intangible assets). The Successor Company’s August 30, 2009 statement of financial
position reflects the allocation of the business enterprise value to assets and liabilities immediately
following emergence as follows:
Business enterprise value .......................................... $2,275,000
Add: Fair value of non-interest bearing liabilities (non-debt liabilities) ...... 744,071
Less: Fair value of tangible assets, excluding cash ...................... (1,031,511)
Less: Fair value of identified intangible assets ......................... (1,459,500)
Reorganization value of assets in excess of amounts allocated to identified
tangible and intangible assets (Successor Company goodwill) ........... $ 528,060
The following represent the methodologies and significant assumptions used in determining the fair value of
intangible assets, other than goodwill.
Certain indefinite-lived intangible assets which include trade names, trademarks and technology, were
valued using a relief from royalty methodology. Customer relationships were valued using a multi-period excess
earnings method. Certain intangible assets are subject to sensitive business factors of which only a portion are
within control of the Company’s management. A summary of the key inputs used in the valuation of these assets
are as follows:
• The Company valued customer relationships using the income approach, specifically the multi-period
excess earnings method. In determining the fair value of the customer relationship, the multi-period
excess earnings approach values the intangible asset at the present value of the incremental after-tax
cash flows attributable only to the customer relationship after deducting contributory asset charges. The
incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their
present value. Only expected sales from current customers were used which included an expected
growth rate of 3%. The Company assumed a customer retention rate of 95% which was supported by
historical retention rates. Income taxes were estimated at a rate of 35% and amounts were discounted
using rates between 12%-14%. The customer relationships were valued at $708,000 under this
approach.
• The Company valued trade names and trademarks using the income approach, specifically the relief
from royalty method. Under this method, the asset values were determined by estimating the
hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were
selected based on consideration of several factors, including consumer product industry practices, the
existence of licensing agreements (licensing in and licensing out), and importance of the trademark and
trade name and profit levels, among other considerations. Royalty rates used in the determination of the
fair values of trade names and trademarks ranged from 1% to 5% of expected net sales related to the
respective trade names and trademarks. The Company anticipates using the majority of the trade names
and trademarks for an indefinite period. In estimating the fair value of the trademarks and trade names,
nets sales were estimated to grow at a rate of (7)%-10% annually with a terminal year growth rate of
2%-6%. Income taxes were estimated at a rate of 35% and amounts were discounted using rates
between 12%-14%. Trade name and trademarks were valued at $688,000 under this approach.
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